Huge number of comments from Japanese politicians and officials today. I summarise.
• Mr Amari, the Economy Minister, acknowledged that the Finance Minister, Mr Aso was responsible for currency matters. Definitely got his tail tweaked following his recent remarks which temporarily strengthened the Yen. Mr Amari added that discussions between the BoJ and the government were progressing well.
• Mr Amari, Mr Aso and the BoJ governor Mr Shirakawa met today to discuss a joint statement to be issued, post the BoJ meeting on the 22nd January – looks as if a joint statement will, indeed, be made. There were also strong hints that the BoJ will agree to a 2.0% inflation target to be reached in the “medium term”. Whilst the definition of “medium term” will not be set out as a specific date, the governor of the BoJ will continue to participate at an economic panel where he will be pressured to increase inflation to the 2.0% target;
• In addition, Reuters reports that the BoJ may agree to an open ended bond purchase programme until Japan reaches its 2.0% target. Reuters adds that the BoJ may also consider scrapping interest it pays on funds deposited with it.
• Mr Aso, the Finance Minister, stated that he would not comment on the Yen. He added it was the responsibility of both the BoJ and the government to ensure that the inflation target of +2.0% was reached;
• One of the PM’s key advisers, Mr Hamada, stated that the BoJ is likely to introduce some kind of monetary easing next week, with fiscal policy following – there are suggestions of an open ended bond purchase programme, though the idea of targeting a specific unemployment rate seems to be losing support;
• Very interestingly, Mr Hamada stated that “Yen 100 is a good level for Japan, 110 is too weak, but Yen 95 to Yen 100 is no problem”. I thought the Finance Minister was responsible for making statements on the currency – Oh well, he is a key adviser to the PM. He added that he did not like the idea of infinite easing, as inflation could become embedded – he prefers that the term for easing be set, dependent on economic conditions. Furthermore, he hinted at introducing some changes to the BoJ law to ensure that the BoJ can’t engage in too restrictive a monetary policy in the future.
The Yen weakened marginally on the statements, but has retreated since. Don’t understand – seems pretty punchy policies, if they are enacted as suggested. However, I’ve shorted the Yen far more aggressively. Mr Hamada and Japanese politicians and officials continue to believe that they can micro manage the Yen – they will find out differently.
The Nikkei is on steroids – it closed +2.9% higher today;
Japanese November industrial production declined by -1.4% M/M, as opposed to +1.7% in October.
Capacity utilisation was -0.2% lower, as opposed to +1.6% in November M/M;
Chinese Q4 growth rose by +7.9% Y/Y, a reversal of 7 consecutive Q’s of declines, though the slowest since 1999. GDP came in at +7.8% for 2012. The increase in GDP was mainly due to higher spending on infrastructure. However, the residential property sector also improved, which contributed to the higher growth.
Fixed asset investment rose by +20.6% in 2012 Y/Y (+20.7% Y/Y expected).
Industrial production was up +10.3% M/M (+10.2% expected) in December (+10.0% Y/Y) up from +10.1% M/M in November.
Retail sales rose by +15.2% (+15.1% expected) in December M/M (+14.3% Y/Y), up from +14.9% in November M/M;
Chinese home prices rose in 54 of the 70 cities the government follows in December, up modestly from the 53 in November. However, the increase in prices was the largest number since April 2011. Prices fell in 8 cities, as opposed to less than the 10 cities in November. Rising property prices is one of the largest drivers of Chinese GDP. There are conflicting reports about whether a nationwide property tax, proposed by the outgoing Mr Wen, will be introduced. To many conflicting views, which suggests that the proposal will be in hold for a while;
Interesting article in the FT today. Based on a “Li Keqiang Index” (“LKI”), essentially an index which is based on power production, rail freight etc, the FT calculates that Chinese GDP is around +5.5%, rather than the +7.9% reported today. Mr Li Keqiang, is the incoming premier of China and stated in the past that Chinese economic data was “man made” and he preferred more tangible data points, such as those stated above. You will not be surprised that I will follow the LKI index. Another issue which suggests that Chinese data is overstated is commodity prices – iron ore and coal. Yes, prices have indeed risen, but by not as much as was the case in 2010/2011. Furthermore, the FT warns of a potential rise in inflation in China – yep, I see that too;
The Bank of Italy has reduced its 2013 GDP forecast to -1.0%, from -0.2% previously – bad news;
The Bank of Spain announced that bad loans amounted to 11.38% of all loans in November. Spanish banks are going to need a lot more capital. It is going to be interesting to see which Spanish banks return their LTRO loans to the ECB – the 1st repayment opportunity starts shortly;
Mrs Merkel faces a regional election in Lower Saxony this weekend. Whilst her CDU party leads the SPD in polls, support for Mrs Merkel’s coalition partner, the FPD is collapsing to below 5.0% (currently estimated around just 3.5% nationally, well lower than the approx 15% at the last election), which would mean that the FPD would not have any representation in the State Assembly. As a result, the SPD/Green coalition may win in Lower Saxony. The polls suggest a dead heat at present. If the SPD/Greens win in Lower Saxony, they will have control of the Upper House, which could pose a problem for Mrs Merkel if she wants to pass legislation;
UK retail sales unexpectedly declined by -0.1% in December M/M, as opposed to the rise of +0.2% expected. Retail sales rose by just +0.3% in December Y/Y. However, on-line sales were 10.6% of all sales in December, higher than the 9.4% the previous year. Cable sold off following the release of the data – currently US$1.5927;
The Philly Fed index declined to -5.8, in December, from +4.6 in November and well below the forecast of +5.6. New orders declined to -4.3, from +4.9 in November, with the employment component down to -5.2, from -0.2 in November. Inflation was lower, with the index of prices paid lower at 14.7, as compared with 23.5 in November, with output prices down to -1.1, from 12.4 previously.The weaker report diverges from the national data released the previous day, which suggested that manufacturing was rising. The ISM report, to be released on 1st February should help clarify the situation;
It looks as if the Cayman Islands will become less of a tax haven. In addition, companies and Hedge Funds will be forced to disclose additional information. The noose around tax havens etc continues to be tightened globally;
The IEA has revised higher its demand growth forecast to +930k bpd for the current year, up from +865k bpd previously. The IEA expects that consumption will increase in China, the US and Brazil, whilst production has been cut by Saudi Arabia – bad news;
Outlook
Asian stocks rose the most in 2 weeks following the better Chinese economic “data”. The Nikkei closed +2.9% higher, with the Shanghai Composite up +1.4% higher and +17% higher from its 4 year low in December. Looks like the Shanghai Composite has a bit further to go, but I’m looking to exit shortly.
Spot gold is trading marginally higher at US$1689, with March Brent at US$110.61, down on the day – surprising given the IEA news.
The Euro is weakening – currently US$1.3363, with the Yen starting to decline again – currently Yen 89.92 against the US$. I have to say, I would have thought it would be trading well above 90 today, given the comments from Japan.
By close of play today I will have reduced my equity holdings by some 30%. I far prefer to play currencies at present and continue to believe that markets are overbought, with downside risks being ignored. However, I must admit on the positive side, there is a continued rotation out of bonds and into equities. The US political fight over the debt ceiling/spending cuts continues to be a concern, which I believe could well become particularly contentious.
Have a great weekend.
Kiron Sarkar
18th January 2013
